Category: Economics

Vanilla is worth more than silver

The price of vanilla has hit a record high of $600 (£445) per kilogram for the second time since 2017 when a cyclone damaged many of the plantations in Madagascar, where three quarters of the world’s vanilla is grown. Silver by comparison currently costs $538/kg.

Demand for vanilla has kept the prices high, leading some ice cream manufacturers to cut back and even halt production of the flavour, sparking fears of shortages over the summer.

Here is the full story, and note this:

Replacement printer ink cartridges can cost between $8 and $27, depending on the type of printer you have. A single black ink jet cartridge from one major manufacturer can cost $23 for just 4ml of ink – enough to print around 200 pages.

Manufacturers argue they need to charge this to cover the loss they are selling the printer hardware at, together with the research and development they do on ink technology. But cut open an ink cartridge and you will see that most of the space inside is taken up with sponge, designed to help preserve and deliver the ink.

And when you are paying what works out to be around $1,733/kg of ink, you might be better off printing with pure silver instead.

New issue of Econ Journal Watch

Volume 15, Issue 2, May 2018

In this issue:

Do ghastly images much reduce smoking? A study published in Tobacco Control reports large impact from mandated graphic warning labels—pictures of disease, suffering, and death—on cigarette packages in Canada. Trinidad Beleche, Nellie Lew, Rosemarie Summers, and J. Laron Kirby raise empirical challenges and suggest that the reported impact is greatly exaggerated.

Colonial Maryland’s bills of credit: Fiat money, discounted securities, or something else? In Economic History Review, James Celia and Farley Grubb argue that the dollar-denominated bills of credit circulated at less than face value like discounted securities. Ron Michener offers evidence that they circulated at par with specie and were treated as interchangeable with specie dollars. Farley Grubb replies, disputing Michener’s reading of the evidence.

Another pathPatricia Saenz-Armstrong describes the history and current standing of liberalism in Peru, extending the Classical Liberalism in Econ, by Country series to 18 articles.

Dissing TMS: After Adam Smith died in 1790, The Theory of Moral Sentiments soon came to be disparaged and disregarded, and was largely forsaken all the way up to the late 1970s. Compiled here are quotations from 26 critics of TMS. The long train of ‘dissing’ is striking in light of our warm regard for TMS today. But have the criticisms ever been answered?

Esoteric instruction: Republished here by permission of University of Chicago Press is a chapter from Arthur Melzer’s landmark work Philosophy Between the Lines: The Lost History of Esoteric WritingThe chapter explains pedagogical esotericism, in which the author sparks the superior reader to work to find things beyond the exoteric.

EJW Audio: Patricia Saenz-Armstrong on Economic Liberalism in Peru

GDPR is centralizing the market

GDPR, the European Union’s new privacy law, is drawing advertising money toward Google’s online-ad services and away from competitors that are straining to show they’re complying with the sweeping regulation.

The reason: the Alphabet Inc. GOOGL +2.58% ad giant is gathering individuals’ consent for targeted advertising at far higher rates than many competing online-ad services, early data show. That means the new law, the General Data Protection Regulation, is reinforcing—at least initially—the strength of the biggest online-ad players, led by Google and Facebook Inc.

Here is the full WSJ story.

The ongoing experiment with bootstrap equilibria, also known as tokens

There are many economics papers on bootstrap equilibria, for instance if agents in an economy expect it will do well, maybe that translates into actual results through the mechanisms of confidence, investment, and so on.

Right now we have a huge and unprecedented laboratory for testing claims about bootstrap equilibria, namely crypto and in particular the markets for tokens.  Imagine you are a private entrepreneur, and you have a new idea for how a money or store of value should be run.  Yet, to give your asset some value, you need to convince others your idea is valid.

One option is to write better software than that governing existing crypto-assets.

Another option, increasingly popular, is to use your market power in some good or service to make your “gift certificate” (read: token) more focal.  Let’s say for instance that you have invented a new computer game that in some regards is better than that of the competitors.  The “old school” approach was to sell the game for a profit, and of course that still often goes on.

Yet there is now another option.  Try to cash those potential profits into yet higher profits by using them to build focality for a new money.  Issue tokens that can be used to play the game.  You hope that will create a demand for the new money you are issuing and thus bootstrap its value.  If requiring money to be used to buy a “get out of jail card for having paid your taxes” works for Uncle Sam, might not “get to play this computer game token/card” give your money positive value too?

Let’s say the market can support 4000 different monies, one public the others private.  In equilibrium, which are the services that get tokenized?  Is it?:

1. The services with high mark-ups?  Low mark-ups?

2. Big consumer bases?

3. Well informed and well coordinated consumer bases?

4. “Influencer” consumer bases, in the Gladwellian sense?

5. “Trivial” consumer bases, that you don’t mind risking?

6. Some other properties?  What I observe so far is that crypto-assets are being created by nerdy tech types, and thus they are linked to goods and services that also are created by those same nerdy tech types — a classic economies of scope, lack of trust on the supply side question.  I doubt if many of the top executives at Nordstrom are sitting around wondering whether their next Fall sale should be attached to a crypto-token.  But exactly why not?  This probably boils down to trust issues, rather than any intrinsic suitability of the product.

Is there any good theory paper on these questions?

Note that Heinrich Rittershausen, writing in the early twentieth century, thought that eventually most goods and services would be self-financing through their own currencies.

What theory of bootstraps can we divine from the data on which tokens meet the market test?  (Or is it too early to say?…but surely we can start in on a measurement…)  Am I correct in thinking that the really successful consumer products just want to take the profits and run, without bothering with tokenization?  There is no such thing as an Apple token, is there?

Help!  And no, I am not giving away free tokens…for any good or service.

The safety net in Ethiopia

They are participants in Ethiopia’s Urban Productive Safety Net Project, which was launched in 2017 and is among the largest social programmes in sub-Saharan Africa (outside South Africa) designed specifically for urban areas. About 400,000 poor Ethiopians in 11 cities are already enrolled. The government hopes it will eventually help 4.7m people in almost 1,000 towns. Beneficiaries are selected by a neighbourhood committee based on how poor and vulnerable they are. In addition to the paid work, they also receive training. Those who want to start their own businesses are given grants.

Safety-nets, in one form or another, have proliferated across Africa in recent years. Spending on them in sub-Saharan Africa now amounts to about 1.5% of GDP (see chart). In Tanzania 10% of the population is covered by its safety-net (at a cost of just 0.3% of GDP)…

Ethiopia’s programme is a step towards building a national social-security system that will, in time, replace a hotch-potch of small ones. It builds on Ethiopia’s flagship rural safety-net, which is the largest of its kind on the continent and covers some 10m poor people in the countryside (out of a total population of about 102m). The government has committed $150m to fund the new scheme and the World Bank has stumped up the remaining $300m needed for the first five years. Ethiopia hopes that within ten years it will no longer need help financing the programme.

Here is more from The Economist.  You can think of this as further evidence of state capacity in Ethiopia.

Is there a Chinese salamander bubble?

Bizarrely, only 3 percent of the animals raised by the farms are eventually sold to restaurants. The rest are sold to more start-up farms. This absurd amphibian Ponzi scheme so inflated the worth of the salamanders that a small, 2-kilogram individual could sell for around $1,500. As a result, people began supplementing the farmed stock by illegally collecting the animals from the wild. “The high prices created a sort of salamander rush,” says Jing Che from the Kunming Institute of Zoology, who was involved in the recent study.

That is from Ed Yong, via Brian Slesinsky.

What the Randomistas Taught TOMS

You probably know the story of Tom’s shoes (here told by Andrew Leigh):

After a visit to Argentina businessman Blake Mycoskie decided he wanted to do something about the lack of decent footwear in developing nations. A talented entrepreneur, Mycoskie had founded and sold four companies by his thirtieth birthday. Now he was affected by the poverty he saw in villages outside Buenos Aires”… “I saw the real effects of being shoeless: the blisters, the sores, the infections.”

To provide shoes to those children, Mycoskie founded ‘Shoes for Better Tomorrows’, which was soon shortened to TOMS. The company made its customers a one-for-one promise: buy a pair of shoes and TOMS will donate a pair to a need child. Since 2006, TOMS has given away 60 million pairs of shoes.

Perhaps you see where this is going (but don’t be too sure!):

Six years in, Mycoskie and his team wanted to know what impact TOMS was having, so they made the brave decision to let economists randomize shoe distribution across eighteen communities in El Salvador…

The results from the World Bank study were not great:

Results indicate high levels of usage and approval of the shoes by children in the treatment group, and time diaries show modest evidence that the donated shoes allocated children’s time toward outdoor activities. Difference-in-difference and ANCOVA estimates find generally insignificant impacts on overall health, foot health, and self-esteem but small positive impacts on school attendance for boys. Children receiving the shoes were significantly more likely to state that outsiders should provide for the needs of their family. Thus, in a context where most children already own at least one pair of shoes, the overall impact of the shoe donation program appears to be negligible, illustrating the importance of more careful targeting of in-kind donation programs.

In other words, the shoes didn’t add much to health but did increase feelings of dependency. Another bubble punctured by economists. End of story, right? No. To their great credit TOMS took the results to heart. TOMS reevaluated how they give, they made adjustments, they changed. The lead researcher Bruce Wydick wrote:

By our agreement, [TOMS] could have chosen to remain anonymous on the study; they didn’t…For every TOMS, there are many more, both secular and faith-based, who are reticent to have the impacts of the program scrutinized carefully by outside researchers…many organizations today continue to avoid rigorous evaluation, relying on marketing cliches and feel-good giving to bring in donor cash. TOMS is different…

Will TOMS’ new methods work better? Only randomization will tell. Fortunately, TOMS is committed to doing just that.

This is from Andrew Leigh’s excellent new book Randomistas. Leigh tells the story of how randomized controlled trials are being used to improve teaching, crime fighting, charitable giving and more. It’s a good read and even in areas that I know well, such as crime research, I learned new information. Leigh is also careful to point to the studies that didn’t replicate as well as those that did.

By the way, Leigh is a person to keep to an eye on. In 2011, he was awarded the Economic Society of Australia’s Young Economist Award, given to “honour that Australian economist under the age of forty who is deemed to have made a significant contribution to economic thought and knowledge.” As you can see from Google Scholar this was a well-deserved award. Yet even as he received this award, Leigh had already left his position at Australian National University to embark on a second career as a Member of Parliament. Since starting his second career, however, he has published three well received books about politics, economics, and inequality and now the world of randomized controlled trials! Look for Andrew as a future Australian Treasurer and who knows what more.

A microeconomic guide to travel, including Ethiopia

That is my latest Bloomberg column, here is the opener:

I sometimes wish the market supplied “travel guides as if microeconomics really mattered.” Most guides outline the major sights and the best hotels, but what about the little things that make up so much of the value of a trip? Here’s my handy introduction to the micro side of travel, based on my recent 10-day stay in Ethiopia. You should consider investigating these same factors before choosing a destination:

How are the sidewalks?

I enjoy walking around cities, but it’s not just the quality of the architecture or the vitality of the street life that matter. The quality of the sidewalks is a central consideration, especially in emerging economies. What good are the sights if you are looking down all the time to avoid a slip or a broken ankle because of gaping holes? Sometimes major thoroughfares have no sidewalks at all.

I am happy to report that in Addis Ababa, the capital city of Ethiopia, the quality of the sidewalks and street paths is high enough to sustain productive walking with your head held high. Most of the time. B, and B+ outside the capital.

There is much more at the link, definitely recommended.

Ben Thompson on data portability and Facebook

The problem with data portability is that it goes both ways: if you can take your data out of Facebook to other applications, you can do the same thing in the other direction. The question, then, is which entity is likely to have the greater center of gravity with regards to data: Facebook, with its social network, or practically anything else?

Remember the conditions that led to Facebook’s rise in the first place: the company was able to circumvent Google, go directly to users, and build a walled garden of data that the search company couldn’t touch. Partnering or interoperating with companies below the Bill Gates Line, particularly aggregators, is simply an invitation to be intermediated. To demand that governments enforce exactly that would be a massive mistake that only helps Facebook.

Link to the post, with further explanation, is here.  You can and should subscribe to Ben here.  Here is my earlier post on data portability.

Software is Eating the World-Tesla Edition

Last week Consumer Reports refused to recommend Tesla’s Model 3 because it discovered lengthy braking distances. This week Consumer Reports changed their review to recommend after Tesla improved braking distance by nearly 20 feet with an over the air software update!

Last week, after CR’s road test was published, Tesla CEO Elon Musk vowed that the automaker would get a fix out within days.

Until now, that type of remote improvement to a car’s basic functionality had been unheard of. “I’ve been at CR for 19 years and tested more than 1,000 cars,” says Jake Fisher, director of auto testing at Consumer Reports, “and I’ve never seen a car that could improve its track performance with an over-the-air update.”

…In retesting after the software update was downloaded, the sedan stopped in 133 feet from 60 mph, an improvement of 19 feet.

…The improved braking distances raised the Model 3’s Overall Score enough for the car to be recommended by CR

Tesla is also responding to other concerns raised by Consumer Reports. It’s quite astounding that Tesla is able to improve something as physical as braking distance with a software update and also astounding that they are able to update so quickly–even pure software firms don’t respond this quickly! Quite the win for Tesla.

The larger economic issue is that every durable good is becoming a service. When you buy a car, a refrigerator, a house you will be buying a stream of future services, updates, corrections, improvements. That is going to change the industrial organization of firms and potentially increase monopoly power for two reasons. First, reputation will increase in importance as consumers will want to buy from firms they perceive as being well-backed and long-lasting and second durable goods will be rented more than bought which makes it easier for durable goods producers not to compete with themselves thus solving Coase’s durable good monopoly problem.

Dental DNA Beatle rent-seeking markets in everything

A DENTIST who bought John Lennon’s tooth is looking for potential love children of the late-Beatle in a bid to stake a claim to his £400million estate.

Dr Michael Zuk, 45, from Alberta, Canada, purchased the legendary songwriter’s decayed molar at auction in 2011 for around £20,000…

Speaking with The Sun Online, the dentist has sensationally revealed that he plans to stake a claim to the music icon’s vast estate using DNA from the body part.

He said: “I am looking for people who believe they are John Lennon’s child and have a claim to his estate and hopefully I can legitimise their claim.

“John was a very popular guy who was having sex with lots of women and I doubt birth control was on his mind.

…“I would ask anyone who is participating to sign a commission agreement which would mean if they were related they would pay my company a percentage of their inheritance.

“Like a finder’s fee.”

Here is the story, via Michael J.

P.s. Solve for the equilibrium.

Will Ethiopia be the next China?

That is the topic of my latest Bloomberg column, noting that they have been averaging about ten percent growth for the last decade.  I basically make a “deep roots of state capacity” argument, here is one excerpt:

Ethiopia also had a relatively mature nation-state quite early, with the Aksumite Kingdom dating from the first century A.D. Subsequent regimes, through medieval times and beyond, exercised a fair amount of power. Most important, today’s Ethiopians see their country as a direct extension of these earlier political units. Some influential Ethiopians will claim to trace their lineage all the way to King Solomon of biblical times.

In other words, the process of organized, national-level governance has been underway for a long time. It was this relative strength of Ethiopian governance that allowed the territory to fend off colonialism, a rare achievement. It is also why, when you travel around the country, a lot of the basic cuisine doesn’t change much: Dishes are seen as national and not regional…

Like many Iranians, they think of themselves as a civilization and not just a country. They very self-consciously separate themselves from the broader strands of African history and culture. And, as in China, they hold an ideological belief that their country is destined to be great again.

Do read the whole thing.

A One Parameter Equation That Can Exactly Fit Any Scatter Plot

In a very surprising paper Steven Piantadosi shows that a simple function of one parameter (θ) can fit any collection of ordered pairs {Xi,Yi} to arbitrary precision. In other words, the same simple function can fit any scatter plot exactly, just by choosing the right θ. The intuition comes from chaos theory. We know from chaos theory that simple functions can produce seemingly random, chaotic behavior and that tiny changes in initial conditions can quickly result in entirely different outcomes (the butterfly effect). What Piantadosi shows is that the space traversed in these functions by changing θ is so thick that you can reverse the procedure to find a function that fits any scatter plot. He gives two examples:

Note that he doesn’t present the actual θ’s used because they run to hundreds or thousands of digits. Moreover, if you are off by just one digit then you will quickly get a very different picture! Nevertheless, precisely because tiny changes in θ have big effects you can fit any scatter to arbitrary precision.

Aside from the wonderment at the result, the paper also tells us that Occam’s Razor is wrong. Overfitting is possible with just one parameter and so models with fewer parameters are not necessarily preferable even if they fit the data as well or better than models with more parameters. His conclusion is exactly right:

The result also emphasizes the importance of constraints on scientific theories that are enforced independently from the measured data set, with a focus on careful a priori consideration of the class of models that should be compared.

Minimum wage up, fringe benefits down

Gordon Tullock used to make this claim, as have I on many occasions:

This paper explores the relationship between the minimum wage, the structure of employee compensation, and worker welfare. We advance a conceptual framework that describes the conditions under which a minimum wage increase will alter the provision of fringe benefits, alter employment outcomes, and either increase or decrease worker welfare. Using American Community Survey data from 2011-2016, we find robust evidence that state-level minimum wage changes decreased the likelihood that individuals report having employer-sponsored health insurance. Effects are largest among workers in very low-paying occupations, for whom coverage declines offset 9 percent of the wage gains associated with minimum wage hikes. We find evidence that both insurance coverage and wage effects exhibit spillovers into occupations moderately higher up the wage distribution. For these groups, reductions in coverage offset a more substantial share of the wage gains we estimate.

That is from a new NBER working paper by Jeffrey Clemens, Lisa B. Kahn, and Jonathan Meer.

Carl-Henri Prophète emails me

I totally agree about Ethiopia being easy to visit. I went there last December and was baffled by how safe it was. I went outside and easily hailed a Taxi at 11 pm (the blue and white ones that everybody take in Addis not the special ones made for tourists). I’d never find a real Taxi in Port-au-Prince after 8 pm. Except the special (and very expensive) ones you can call on the phone.

What stroke me the most was how cheap Ethiopia was compared to Haiti and low income countries in Africa (especially Tchad, where my wife works). I think this is a major problem for countries like Tchad or Haiti (or Nigeria): they grew too expensive before getting even remotely rich. And this gives me hope that Ethiopia could achieve some significant success in tourism and exports in the coming years. By the way, I think that why a country like Ethiopia is cheaper than Haiti or Chad remains a question to be seriously investigated.

However, the Internet in Haiti is way better and cheaper. Cars in Haiti are also substantially cheaper (3 times cheaper at least, thanks in part to the US being so close). I also think the Internet is largely better and cheaper in Nigeria compared to Ethiopia. This made me think about something you wrote about the future of economic development, with people in countries like Haiti or Nigeria getting more satisfaction from the Internet and relatively cheap electronics instead of jobs and income. My impression is that it’s one of the very few low income country not taking this route currently…

Here is Carl-Henri on Twitter.